Businesses are fundamental elements of the economy globally. They play their part to strengthen the economy of the state. Businesses can be small to large size, an example of a business can be a home industry a farmhouse, a clothing brand, an automobile company, a fan industry, or a hardware industry. All kind of businesses faces ups and downs during their life course. They may face ups and downs, then fall and rise again, This is what we call Phases of the Business Cycle.
When this kind of ups and downs occurs in many businesses gradually, an economic cycle can be monitored backed by Internal and External factors affecting it. More than 10 causes of the business cycle are the core reasons for uncertainties in the market.
Types of Business Cycles
There are two main types of a business cycle
- Classical Cycle which defines ups and downs in total production
- Growth Cycle which refers to the fluctuation in the growth rate of production
Features of Business Cycles
Business cycles are actually considered a guideline for national economic strategists. Small size companies even large size businesses too bothered about business cycles while they are planning for a specific new economical strategy. They decide whether to hire new workers in peak times or use existing staff for overtime or to lay off the existing staff in trough phases because in these phases unemployment and inflation may increase.
Phases of Business Cycles
In a business environment basically, two phases are dominant, which are Prosperity & Depression, others phases are Expansion, Peak, Recession, Depression, Trough, and Recovery.
| The Sequence of the Business Cycle | Names of Sequence |
|---|---|
| 1 | Expansion |
| 2 | Peak |
| 3 | Recession |
| 4 | Depression |
| 5 | Through |
| 6 | Recovery |
Expansion
The very first phase of the business cycle can be termed an expansion. This phase is considered favorable for employment, daily wages, debtors, profit increases, investment, and for sales and goods services. A businessman may invest in a new project or start construction of a new company, debtors may pay their debts and save their money in banks, and employees may start construction for their homes.
Peak
The second phase of the business cycle is the prosperity phase in business. At this phase, the national economy achieves its highest position or peak, and maximum growth is achieved. Manufacturers started manufacturing all the usable products for society and consumers are facilitated in this regard. In this situation investment in different businesses increases rapidly.
Recession
Recession is the third main phase of the business cycle. In this phase, a gradual fall can be measured in product prices, employment, investment, and income. Due to the lack of information about market trends and consumer demands manufacturers keep on continuing the production of products like automobiles, machinery, and other sales, and goods. In this situation consumers did not buy the products, excessive products are available in the market and still continue to supply. Gradually prices of products tend to go down.
Depression
After the recession phase, a prominent decline can be measured in employment, economy continuously falls down below the growth line, this phase is called the depression phase of the economy.
Trough
The trough is the most depressed and worst phase of an economy, in this phase economic negativity prevails rapidly. Investors stop investing in new projects, employees are fired because of the low economy, laborers are offered jobs at low wages, unemployment prevails, sales and goods go down at their lowest, and productivity vanishes. A negative and lowest decrease in economic growth is also observed. Investors thought to end their businesses and move to other countries, pessimistic thinking prevails in the business economy, debts increase again and are hard to pay, banks stop issuing new loans, and interest increased.
Recovery
In this phase, the economy started recovering from the lowest growth rate. Positive thinking prevails in investors about investment and employment also. Due to the low prices, demand grows up, and ultimately suppliers are activated. In this regard economy gradually started strong again.
Matthew is a Co-Founder at BusinessFinanceArticles.org. Matthew was a floor manager at a local restaurant in Wales. He lost his job after the pandemic and took initiative to make a team and start the project.
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